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Determining the fair price or fair value of land is a task that requires attempting to allow for all known factors that would impact the price of the real estate if it were placed on the market. This type of assessment can be used in a number of settings, including the projection of property taxes, estimating the sale price for the property in the current market situation, and even in assessing the property for purposes of using the holding as collateral on a loan. When attempting to determine the fair value of land, it is important to consider factors such as the original acquisition cost, improvements made since that original purchase, and the current demand in the real estate market for land of that particular type and location.
A good place to begin with the assessment of the fair value of land is the original purchase price. This is not necessarily the amount that was financed, and will not include any interest or other fees related to the total amount paid on the mortgage connected with the property. In order to ascertain the original purchase price, identify any amount that was applied as a down payment on the purchase, and add plus the base amount that was borrowed from the mortgage lender.
With the purchase price in mind, move on to identify the costs of any improvements made to the property in the interim. Doing do will provide an idea of how much the owner has invested in the land itself. Assuming that the improvements did increase the property’s market value, allowing for at least the expenses incurred for those enhancements will provide a snapshot of the fair value of land, in terms of the owner’s investment.
Before making assumptions that the actual cost of the land, in terms of original purchase and improvements, constitutes a realistic fair value of land, it is important to realize that the laws of supply and demand will have a direct impact on that value. For example, if potential home buyers perceive the location and condition of the land as being highly desirable, this will increase the market potential of the property and have some impact on the fair value of the land. At the same time, if the area is not considered desirable or the property in its present condition would be unlikely to attract buyers, the fair value of the land may actually be less than the owner’s investment. Keep in mind that whatever the fair value may be, what the buyer is willing to pay will always trump what the land is actually considered to be worth.